Taxpayers are likely going to have to fork out more than the hefty R8,4bn for the 10 soccer stadiums to be used during the 2010 World Cup since national treasury is not requiring the host cities' municipalities to negotiate fixed-price contracts with construction companies.

At the first of a series of government media briefings on 2010 preparations - in itself a welcome development since the Local Organising Committee has to date proved woefully inadequate in its communication efforts - deputy finance minister Jabu Moleketi prevaricated when asked about likely escalation costs.

With long lead times on cement, sky-high prices on steel and a shortage of skilled labour, inflation in this environment of ever-increasing fixed investment spending can only go one way. In fact, economists are predicting double-digit increases in cement prices for most of the next five to eight years. Timber, bricks, piping and galvanised sheeting are all in high demand and, to varying degrees, in short supply.

It is precisely these pricing realities in the supplies market that forced government to insist on a fixed-price contract with Murray & Roberts for the Gautrain. The R24bn rapid rail project started out costing taxpayers a whisker more than R7bn, but within a handful of years the price tag rose threefold.

One of the reasons fixed-price contracts have not been advocated is that they take a long time to negotiate. Despite almost a year of haggling, the project has yet to achieve financial closure.

What the Gautrain and 2010 stadiums have in common is that they are all unique projects. Nothing like them, or on their scale, has been done in the past in SA, so there is no experience for contractors to draw on.

Secondly, there is just no time left. There are Fifa deadlines that have to be met regardless of whatever challenges the contractors have on site. These structures must be delivered by December 2009, or earlier for the stadiums earmarked to host the Confederations Cup in mid-2009. This in itself could push prices up.

Moleketi says the R8,4bn - which is almost three times the initial estimate for government's contribution to stadium construction - already includes escalation costs. If this money is not sufficient, he suggests that the municipalities will have to raise the additional finance through borrowing or other forms of debt.

Most municipalities, however, do not have the balance sheets or management ability to raise money through a bond; only Johannesburg has to date raised a bond on the Bond Exchange of SA and only the six metropolitan areas are deemed creditworthy enough to attempt the exercise.

This would suggest that the cities will go to government with begging bowls in their hands as soon as they run out of funds.

Moleketi says "the money that is in the budget is in the budget" and construction companies will need to "convince us" that the funds are insufficient.

Leaving a back door open for further increases, though, Moleketi says should treasury receive additional demands for funds, that bridge will need to be crossed when the time comes.

Malcolm Simpson, the head of the national treasury's 2010 unit, is defensive about this lack of direction given to municipalities. "Procurement happens at the municipalities. We have not advised them [on procurement]. They are guided by the Municipal Financial Management Act."

Analysts have expressed surprise at treasury's position, given the well-established capacity constraints at local government level.

Moleketi acknowledges that there could be "all sorts of difficulty" with the construction of the stadiums.

The main contractors will be moving on-site in February, which allows only one month for negotiati ng the tender details; this hardly seems enough time to do the kind of tough talking necessary to keep costs under control.

Of the 10 stadiums, six are new or require substantial upgrading, while four have to be refurbished.

Expect the R8,4bn number to escalate. Treasury has also set aside R6,6bn for supporting infrastructure in the cities, such as transport networks.

Financial Mail
Publisher: I-Net Bridge
Source: I-Net Bridge